Spot rates on bonds

Can someone elaborate on this? They come up several times and I cant conceptually picture how they work… TIA

If I recall correctly, the subject refers to synthetically treating each coupon payment as though it were a zero coupon bond. Normally, bonds pay a sequence of interest payments and a lump sum at maturity. The context here is to look at the payment stream as a series of standalone bonds. I think you need to understand this concept pretty well, because later sections of fixed income build upon it.

A spot rate is a point (yield) on the yield curve… Two year spot rate on the treasury yield curve is the yield that the market uses to discount two-year risk free cash flows.

McLeod81 Wrote: ------------------------------------------------------- > A spot rate is a point (yield) on the yield > curve… > > Two year spot rate on the treasury yield curve is > the yield that the market uses to discount > two-year risk free cash flows. good application - thanks